Standing Committee A

[Sir John Butterfill in the Chair]
(Except clauses 13 to 15, 26, 61, 91 and 106, schedule 14 and new clauses relating to the effect of provisions of the Bill on section 18 of the Inheritance Tax Act 1984)

Schedule 21

Taxable property held by investment-regulated pension schemes

Mark Hoban: I beg to move amendment No. 122, in schedule 21, page 142, line 33 [Vol II], leave out ‘residential property' and insert
‘property that is normally used or adapted for use as one or more dwellings'.

John Butterfill: With this it will be convenient to discuss the following amendments: No. 123, in schedule 21, page 142, line 34 [Vol II], leave out from ‘is' to end of line 34 and add
‘any personal chattels other than choses in action (or in Scotland any moveable property other than incorporeal moveable property).'.
No. 124, in schedule 21, page 142, line 36 [Vol II], leave out paragraph 7.
No. 125, in schedule 21, page 143, line 11 [Vol II], at end insert
‘but subject to paragraph 8(2)—'.
No. 126, in schedule 21, page 143, line 22 [Vol II], after ‘(2)', insert
‘Except where a member or related person as defined in section 4 is resident,'.

Mark Hoban: May I welcome to the Chair, Sir John? If anyone is talented and qualified to chair a debate about pensions, it is you. I am sure that we will benefit from your wise guidance in what I hope will be the ultimate sitting of the Bill. Now that the Economic Secretary is in his place, I shall move amendments Nos. 122 to 126.

John Butterfill: Order. The hon. Gentleman cannot move all the amendments at once. He can move only amendment No. 122. We can debate the others, and if he wishes to move them separately thereafter, he is at liberty to do so.

Mark Hoban: Thank you for your guidance, Sir John.
Amendments Nos. 122 to 124 seek to change the Bill’s definitions back to the definitions that applied prior to the Finance Act 2004. Committee members might remember from our proceedings on Thursday that, in the Finance Act 2004, a number of rules relating to the investments that a self-invested personal pension could make were removed or liberalised with a view to encouraging investment in a wider range of assets. Subsequently, in the 2005 pre-Budget report, the Government reversed that, and we see in this Bill quite a complex series of rules concerning residential property.
The amendments probe why the Government have not simply sought to reinstate the pre-2004 position. Rather than going into depth to distinguish between different types of potentially residential property—nursing homes, beach huts, prisons, hospices and a range of different assets—the old rules, although brief, were clear, as was the associated guidance. For example, paragraph 11.18 says:
“Commercial property with a residential aspect, such as hotels, guest houses and nursing homes, is not a prohibited investment. It would not however be permissible for the member or any connected person to use the facilities other than at a commercial rate.”
Those were the rules in place. We seem now to have a much more complex set of rules.
I draw the Committee’s attention to paragraph 7(1)(b) of proposed new schedule 29A to the Income and Corporation Taxes Act 1988, which expands on the meaning of the phrase “residential property”. It will include
“any land consisting of, or forming part of, the garden or grounds of such a building (including a building on any such land) which is used or intended for use for a purpose connected with the enjoyment of the building”.
The paragraph makes explicit reference to beach huts. It seems also to refer implicitly to sheds, greenhouses, Wendy houses and any other form of garden building. I am concerned that the definition seems to be getting more complicated, and I am not sure why.
The definition includes gardens. In my constituency, many back gardens are now being used for development. If I had a SIPP, I could legally buy a field with the intention of using it for residential development, but apparently I could not put my back garden into the SIPP if I wanted to build some more houses there. That seems a curious distinction for the Government to draw when they are keen to build more residential property on brownfield sites.
In responding to amendments Nos. 122 to 124, will the Economic Secretary explain in more detail why the Government have sought to define “residential property” when the previous rules worked very well? It is almost as though, having decided to abandon the previous rules, the Government have let the genie out of the bottle and are having a great deal of difficulty putting it back.

Rob Marris: Will the hon. Gentleman tell the Committee whether he is in favour of “backfill” as it is sometimes called—that is, building homes in gardens as brownfield sites? He seems to be, given that he wishes people to be able to put them in their SIPPs as an investment, so that they can build homes in big back gardens.

Mark Hoban: The issue of brownfield development and whether back gardens should be developed is controversial and will probably be the subject of a debate tomorrow in the House, in which I hope to express some thoughts on the issue.
Rather than wishing to encourage more brownfield development on back gardens, I was just pointing out the distinction that the Bill seems to draw. It separates one type of land purchase for residential development from another. That was the point that I wanted to tease out from the Economic Secretary. In a way, I also wanted to tease him in that the Minister for Housing and Planning is keen to see more residential development in back gardens and similar brownfield sites.
I turn to amendments Nos. 125 and 126. In schedule 21, distinctions are drawn between different types of residential property. There are particular, complex rules that relate to hotels and similar forms of accommodation. I understand the rules’ purpose; some people’s residence may well be part of a hotel. Given that the Government seek to clamp down on personal benefit in respect of residents’ property, I understand the route that they are going down.
It seems odd, however, that when we come to the different category of residential properties set out in part 2(8)(1), a distinction is drawn. The Government do not seem as concerned about the people who live in one of the properties listed there having some personal benefit. For example, paragraph 8(1) lists children’s homes, student halls of residence, residential or nursing accommodation for the elderly, hospitals, hospices, prisons or similar establishments. My amendments Nos. 125 and 126 seek to impose on residents of those properties, when they are connected to a pension scheme member, constraints similar to those imposed on people whose residence is part of a hotel.
Will the Economic Secretary explain why he has separately identified a hall of residence—a place where people pay to live and may get meals? Why is the tax treatment of people connected to pension fund members who live in such a place different from that of people who are similarly connected but live in a hotel? We need consistency on the issue. Amendments Nos. 125 and 126 seek to extend the rules.
I turn to an allied point. I am not entirely sure that I know what the definition of a “hall of residence” is. The explanatory notes suggest that it is not a collection of houses. Student houses, of which your constituency has a number, Sir John, do not constitute a hall of residence. However, at what point does a house become a hall of residence for the purposes of the Bill? There are issues around the accommodation of students in many of our towns, and it would be helpful if people could understand the distinction. I seek the Economic Secretary’s guidance and explanation.

Edward Balls: Welcome again to the Chair, Sir John. We hope to have a productive day and move through a number of clauses. I will try to make sure that while responding in detail to the hon. Member for Fareham (Mr. Hoban), I do so as expeditiously as possible.
We discussed the broad thrust of these issues when debating the previous clause last Thursday. We got into some of the more general issues surrounding beach huts and other ways in which people might try to use the opportunity to invest in lifestyle areas using pension tax reliefs. There is a consensus on all sides that is something we do not want, but the question is how?
Schedule 21 and part 2 of schedule 21, to which these amendments apply, provide the basic definitions of taxable assets so that we can prevent people from abusing the generous tax reliefs they are given on pension savings to purchase assets that may benefit them personally. The tax reliefs are given in order to help save the fund that will ensure secure income in retirement. They are not there to provide a means of buying assets for the personal use of pension scheme members. The taxable assets targeted by the schedule are those where personal use is most likely. These are different versions of residential property and tangible, moveable property.
Amendments Nos. 122 and 124 propose that the definition of residential property in the Bill be replaced with the reverse definition that is derived from the regulations that were in effect before A-day. The hon. Member for Fareham asked me about this point in particular and why, if the previous definitions are understandable and are not dissimilar to the definitions that are here today, we did not stick with the previous rules. As I explained last Thursday, the answer is that we looked at the previous rules in a number of areas and found that there was imprecision, a lack of clarity and the language was outdated. For example, the term previously used for tangible, moveable property was “personal chattels”. It is an outdated term, outside the parameters of the Bill and rarely used in common parlance. Those definitions have worked for a number of years but, over time, there was a considerable need for substantial guidance in order to interpret some of the looseness in the definitions that had arisen. What we are seeking to do in this detailed schedule today is to bring in some precision and to clear up some minor loopholes to make sure that we are as clear as we can be in legislation, rather than having to rely on guidance in how we will apply the regime.
The first amendment removes the reference to garden, grounds and outbuildings. It is important for pension schemes to be clear that the legislation covers such items. Further, if the references are removed, it would open up the prospect of pension schemes attempting artificially to reduce the tax charges by claiming that substantial parts of the value of a residential property is instead within the grounds or the outbuilding. The legislation is designed to prevent such private use of pension scheme assets. Allowing the person to sell their gardens into a SIPP would allow a loophole in the legislation whereby people could sell private land. The legislation strikes a balance between preventing people from using private assets from which they can get personal benefit and the sensible use of pension fund moneys.
Secondly, the amendment removes the provisions that treat parts of buildings as separate buildings. It is an important provision that allows pension schemes to own commercial parts of a building that also contain residential property owned by other parties. The amendment also removes the reference to beach huts, which we debated on Thursday, and prevents schemes investing in these relatively expensive structures that would be available for private use by members. When the committee reflected on the scale and cost of beach huts and their extensive private use in today’s world, as well as on the desirability of whether one wants to be inside or outside a beach hut, I think we would agree on both sides that that we do not want directly to subsidise that through the tax system, using pension tax relief.
Finally, the amendments would remove the reference to hotels. This is an essential part of the drafting of the schedule, as it links in with provisions in paragraph 14 which prevent schemes investing in timeshare-type properties. This is estimated to cost up to £20 million in the first four years as pension savings are directed towards hotels and other holiday lettings. Allowing people to buy, in such a detailed way through their pension fund, a particular room in a timeshare-style way to invest in a hotel, is not the intention on either side of the House. The provisions do not disallow more general investment in hotels; the issue is whether one is allowed to use one’s pension fund to invest in a particular room in a particular hotel for one’s personal use.
Amendment No. 123 seeks to replace the definition of tangible moveable property in the schedule with a definition based on the concept of personal chattels. The alternative definition proposed in the amendment is, as I said, derived from the previous regime. In our view, that old terminology is a bit out of date. The Bill contains simpler definitions that are easier to understand, and that is a better way forward. We published a draft order and asked the pension industry to comment on the range of definitions and types of tangible moveable property, and we have a satisfactory outcome.
Amendments Nos. 125 and 126 relate to the part of the schedule that removes completely from the scope of the measure categories of commercial or public accommodation used to house large groups of unconnected individuals, including children’s homes, nursing homes and prisons. The amendment would bring the excluded categories of accommodation back into the taxable property provisions if a pension scheme holds the accommodation and a member of the scheme, or a person related to that member is resident in it. The likelihood of a pension scheme buying a children’s home, hospice or hall of residence for the personal use of a member—and therefore avoiding the taxable property provisions—is very low. It is different from the example of beach huts. A beach hut for one’s personal use and that of one’s family is much more meaningful. It would be impossible and impractical for pension schemes with many thousands of members to monitor all members and related persons to determine whether they were benefiting personally from an investment that the scheme has made.
The exceptions from the charge will apply to institutional accommodation only where a number of unconnected individuals reside. A private family home does not apply, but a home for the residential accommodation of children is quite different. To answer the question that the hon. Member for Fareham asked earlier, in the case of investment in a hall of residence, although such buildings act as dwellings for people to live in, they are essentially commercial operations. It is unlikely that one would invest in a pension scheme to buy a large hall of residence to benefit one’s son or daughter. There is little risk of that problem arising.

Mark Hoban: I am grateful to the Economic Secretary for his comments so far. He said that halls of residence, children’s homes and residential homes were places where a large number of unconnected persons could be together. Will he define what he means by a large number?

Edward Balls: If one were to buy a house on the Cowley road, put a sign outside it that said “Hall of Residence” and then install one’s son or daughter, such a property would fail the test. On the other hand, if a college or a private company invested in a block with a number of rooms or a set of houses that were to be commercially let, that property would clearly count as a hall of residence if a number of individuals who were probably unconnected to the investors in normal business were to rent from that company.
We do not rule out the idea that, if one invests in a commercial property with a number of student residents, one’s son or daughter might end up renting there, but that would be unusual. It would need to be clear that that was not the intention of the investment; there would need to be a number of other individuals in the property. It is clear that that would be different from investing in a beach hut, a second home or a larger building at the end of one’s garden. It is not for me in debating the measure to put a precise number on that, but it is pretty clear what the intention is and why there is a distinction between a student hall of residence and an individual buying a second or third home for the benefit of a son or daughter.
Obviously, we will need to make it clear in guidance exactly how the rules will be applied in implementing the legislation. However, we are getting to a better place than we were under the previous regime.
I have covered the detailed amendments tabled by the hon. Member for Fareham. We have the opportunity to debate the broader issues about housing policy, design and supply later in our proceedings.

Mark Hoban: I am grateful to the Economic Secretary for his explanation. He demonstrated the Government’s problem in that, having decided to scrap the rules two years ago, it is now difficult to put the system back in place to stop further abuse. It would have been better to have thought such issues through first rather than scrap a regime and impose a new one.
When I asked how large the number of unconnected people had to be, the hon. Gentleman gave the polar extremes. I visit several rest homes in my constituency in which there are six, seven, eight or nine residents, so someone related to a member of the pension fund might be in a small rest home. There will be some definitional issues at which people will look closely. I think that the 28 pages of guidance that have been published about the matter will grow over time, rather than diminish, as the issues are teased out by people who work in such areas.

Edward Balls: Is the hon. Gentleman saying that the definitions and rules are inferior to the regime that applied pre A-day? Does he wish to return to a pre A-day regime? Does he not understand the use of common sense when applying such definitions?

Mark Hoban: When we reach the clause stand part debate, I shall explain the other problems that I have with the provisions and say why they are not as clear in some respects as the pre A-day rules. The Paymaster General commented about advisers probing and trying to push the boundaries and I am sure that the same will happen in respect of the issue under discussion. It may be a matter of common sense, but people will look for loopholes to see how the rules can be used to benefit pension funds. Given the fact that the Economic Secretary’s explanation and my remarks have opened up more latitude, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Edward Balls: I beg to move amendment No. 393, in schedule 21, page 151, line 31 [Vol II], at beginning insert
‘For the purposes of paragraph 23'.

John Butterfill: With this it will be convenient to discuss the following amendments: No. 129, in schedule 21, page 152, line 8 [Vol II], leave out ‘10% or more' and insert ‘more than 10%'.
No. 130, in schedule 21, page 152, line 10 [Vol II], leave out ‘10% or more' and insert ‘more than 10%'.
No. 133, in schedule 21, page 152, line 11 [Vol II], leave out ‘10% or more' and insert ‘more than 10%'.
No. 131, in schedule 21, page 154, line 34 [Vol II], leave out
‘(a) any member of the pension scheme'.

Edward Balls: The group of previously six, but now four, Opposition amendments and one Government amendment all refer to part 3 of schedule 21, which sets out when a pension scheme acquires and holds taxable property and the extent of the scheme’s interest in that property. Part 3 of the schedule goes into considerable detail about when a pension scheme is treated as holding an interest in taxable property and the extent of that interest. That is essential because it serves several purposes. It ensures that there will be no getting around the rules by investing through companies and other vehicles controlled by the pension scheme or its members. It also ensures that any tax charge reflects the true extent of the pension scheme’s interest in the taxable property. It also prescribes when an investment is to be treated as made through a genuine diverse commercial vehicle. That will allow genuine investment without the risk of abusive tax advantages arising through scheme members attempting to enjoy personal or uncommercial use of their pension scheme assets.
The real estate investment trusts clauses that we debated earlier offer one way in which to invest in residential property. Investments in residential property made through other collective investment schemes, insurance funds and even smaller commercial vehicles will also be acceptable so long as they meet certain requirements in respect of value and diversity: they must not hold an interest in any property of 10 per cent. or more, and they must not hold the property, so that any investor or relative can use it or occupy it.
Where a pension scheme chooses to invest through one of the acceptable types of commercial vehicles as described in part 3 of the schedule, but still invests in taxable property, the members of the scheme who benefit and the scheme administrators will be subject to tax charges that recover the release already given.
Amendment No. 127, which was not moved, and amendment No. 128 referred to issues around the use of hotels, which we discussed in the debate on a previous amendment. Government amendment No. 393 is a highly technical amendment, which does no more than add a cross-reference, erroneously missed out of the published Bill, to ensure that the provisions limiting investment in taxable property to genuinely diverse commercial vehicles will work as intended.
As three of the Opposition amendments—Nos. 129, 130 and 133—are similar, I will deal with them as if they were one amendment, which is the logical thing to do. The purpose of the measure is to remove the tax advantages for pension schemes investing in residential property and other taxable assets, where the members have influence over the scheme’s investment strategy.
That includes where the pension scheme holds an interest in residential property indirectly via a vehicle and the scheme and its members have a sufficiently large interest in the vehicle that they are able to exert influence over it. That is to prevent the diversion of generous tax reliefs that are given to help savers to build a fund into assets that are available to provide personal benefits for scheme members.
The pension scheme, together with any associated person, is therefore precluded from holding 10 per cent. or more of the share capital and voting rights and from being entitled to receive 10 per cent. or more of income distribution or cash on a winding-up in respect of a vehicle that holds taxable property. If it holds a greater interest, tax charges to recoup the relief given on the amount invested will arise.
The amendments seek to change the conditions on the interest that the pension scheme is permitted to have in the vehicle from less than 10 per cent. to not more than 10 per cent. It affects three of the five tests set out of the schedule.
It has been suggested to the Government that there was no abuse of the restrictions on investment in residential property under the old pensions tax regime, so there is no need for a rule covering indirect investments by pension schemes in such assets. We reject that analysis. Preventing direct investment in residential property, while allowing investment via a company or trust, would give the green light to schemes seeking to avoid the provisions. We cannot allow that to happen.
It has also been suggested that, rather than having complex descriptive rules, the Government should have drawn up a list of acceptable, pooled investment vehicles. Although superficially attractive, that would have been wholly impractical. The rules need to have European and international coverage. It would have been virtually impossible to eliminate discrimination and to avoid international loopholes. Instead, the legislation sets out several straightforward characteristics that the vehicles must have to demonstrate that they are genuinely diverse commercial vehicles.
In most cases, it will be clear to investment-regulated pension schemes which large pool of investment schemes are acceptable. For any large organisation, the tests are reasonably lightweight and easy to apply. Most large occupational schemes will not be investment-regulated schemes and will not be within the legislation.
If an investment-regulated pension scheme wants to tread closely to the boundaries and to invest in smaller vehicles, it must expect its compliance burden to be higher. In conclusion, the scheme removes all tax advantages where the pension scheme invests in a vehicle, 10 per cent. or more of which is owned by the scheme and its associates.
Amendment No.131 will disregard any interest in the vehicle held by members of the scheme, when applying the 10 per cent. test. That would open a loophole that was easy to exploit. It would enable a pension scheme and its members fully to control a vehicle that owned residential property. The arrangement would not trigger any tax charges, so long as the pension scheme did not own at least 10 per cent. However, with control of the vehicle, the property would potentially be available for private use of one or more of the members. We estimate that the amendment would cost £10 million per year. We do not want to allow those loopholes to arise. They would allow the abuse of generous tax reliefs. We therefore ask Opposition Members not to press the amendments.

Mark Hoban: May I first deal with amendmentsNos. 129, 130 and 133? The point that I was trying to get at was that those three amendments and amendment No. 131 are very technical. Under the current rules, no one can own a stake of 10 per cent. or more. Therefore, we could have a situation where each member will own a maximum of 9.99 per cent. recurring in the vehicle. Rather than having 10 people own an equal stake in the vehicle, 10 people will own 9.9 per cent. and somebody will own the balance. All I was trying to do was tidy up the measure, so that people could own equal shares in the vehicle. It is not about avoidance, abuse, or exploiting or creating any problems. The aim is to tidy up the drafting so that we could have neat and tidy arrangements for people seeking to use the vehicles to invest indirectly in residential property.
Amendment No. 131 picks up an issue that has been raised with me by one SIPP adviser. I understand that a number of SIPP providers will effectively have an umbrella trust or a master trust set up over a seriesof SIPP arrangements. A member could have his own SIPP, which forms a subset of a much larger SIPP. A SIPP for a small business might be part of a SIPP provided by another company. That company might be based in Fareham and there might be a SIPP based in Newcastle, both of which would be part of the same SIPP umbrella. Each might choose to invest indirectly in residential property through a real estate investment trust, but because they are part of the same SIPP umbrella the risk is that their interest will be added together and come to more than 10 per cent.
That is the issue that I want to probe the Economic Secretary about. Where there is a master SIPP and the participants are different companies or individuals who do not know each other and have no other involvement apart from the fact that they are all clients of a particular firm, their holdings in indirect vehicles will be aggregated under paragraph 30 of the schedule.

Edward Balls: I slightly regret the fact that the hon. Gentleman did not speak before me, as I could then have listened to his comments first. I had interpreted amendments Nos. 129, 130 and 131 as being a rather more complex attempt to probe the thinking behind the potential use of trading companies. I ended up going into rather more detail about how we are treating these issues than he was probably expecting, so I apologise to him for allowing myself to be overly probed.
We think that the application of the 10 per cent. rule is sensible and understandable; it is what we consulted on and what the industry is expecting. While I appreciate the rather more detailed drafting point that the hon. Gentleman proposes, we are where we are, and this is what people are expecting. The best thing to do is to get on with implementing it. I apologise to him for thinking that he was making a bigger point. I could have just said, “Thanks, but no thanks.”
On amendment No. 131 and the issue of indirect holdings of property through a vehicle, the 10 per cent. rule is simply to administer that and is reflected in a number of other areas—for example, a number of double taxation treaties. The figure is common and understood, including in areas where there will be an investment strategy of a company or a vehicle rather than of an individual. Our view is that this is an understood way of dealing with exactly the kind of problem that the hon. Gentleman raises. I do not think, on the basis of our consultation so far with the industry and advisers, that the particular point he refers to, which was made by one SIPP adviser, is reflected more generally across the industry.
We will be conscious of the point that the hon. Gentleman makes to ensure that the guidance is clear, but our consultation so far does not suggest that this will be a general problem. On that basis, while being grateful to him for that further probe, we must reject his proposal.

Amendment agreed to.

Mark Hoban: I beg to move amendment No. 132, in schedule 21, page 159, line 27 [Vol II], leave out from ‘occurs' to end of line 30 and insert—
‘(a) the property becoming residential property;'.
This brief amendment aims to establish the point at which a property that is being converted or adapted becomes residential.

Edward Balls: That is an example of particularly efficient and to-the-point probing. In fact, I was probed so fast that I had not realised that I had been probed by the time the hon. Gentleman sat down. I am not sure whether you did, Sir John.
I am happy to deal with the question. Amendment No. 132 would change when the tax charges arose when a pension scheme converted its commercial property to residential use. We propose a tax charge as soon as the property becomes suitable for residential use, even if the conversion is still going on.
To explain the background, when a pension scheme invests in taxable property but does not do so through one of the acceptable types of commercial vehicle, this measure will remove tax advantages in respect of that investment. The schedule achieves that by making scheme members and administrators liable for tax charges that recoup the tax relief already given in respect of the cost of investment. One way of investing in residential property is for the scheme to convert commercial property, such as a barn, into residential. The amendment is about when tax charges arise on a conversion of the property to residential use.
We are making a minor change to timing in a small proportion of cases. Normally, a property becomes residential property at about the same time that the conversion works are substantially completed. In such a case, the amendment would have no effect, but it might have a limited effect if the property became suitable for use as a dwelling before the conversion works were completed.
It may not always be clear exactly when a property that is being converted or adapted from non-residential use becomes suitable for use as a dwelling. We can imagine that in converting a barn, depending on whether it was sunny or rainy, someone might choose to sleep overnight with a hole in the roof, for example, just to give a colloquial flavour to the deeper point that the hon. Gentleman probes on.
We do not want the tax charge to arise only when a property begins to be used as a residence. That is too late. Nor do we want a charge to arise when it becomes a residential property if the conversion works are still in full swing. That is too early.
It is possible for a property to be suitable for use as a dwelling before the conversion works are completely finished. As I said, there might still be a hole at one end of the barn, or the house itself might be finished but a new garage might be under construction, or the works might be finished apart from post-conversion snagging, which Opposition Members might know can sometimes take not just weeks or months, but years, to complete. Snagging is perhaps a technical term more commonly known to the public than straddling, but it is no less frustrating.
It might even be possible to manipulate the work so that ancillary building works carry on long after the property has begun to be used as private residence. The legislation therefore imposes the tax charges after the property has become suitable for use as a dwelling, but only when the conversion works have been substantially completed.
The test for the works—with apologies to the hon. Gentleman—is a matter of common sense. The measure applies a fine balance, which pension schemes can operate fairly simply—not seeking to recover the tax reliefs too early or too late, but preventing the opportunity for abuse, which might be, as I highlighted earlier, when someone allows the snagging to occur deliberately, rather than inadvertently or frustratingly, for years rather than months.
I hope that that provides some detail for the hon. Gentleman, which of course will be reflected in the guidance and the operation of the scheme. On that basis, I encourage him to withdraw the amendment and the building industry not to see the opportunity for tax-driven snagging in future.

Mark Hoban: I am grateful to the Economic Secretary for his remarks. We will not go down the road of snagging. I know someone who has been in a house for four years and is still completing the snagging list, so to say that completion of snagging is an indicator of when the property is suitable for residential use is to go too far.
I wonder whether a certificate of habitations might be a better way of identifying the transition point between development and residence, but the Economic Secretary has put his views on the record very clearly. Therefore, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposedÂ¸ That this schedule, as amended, be the Twenty-first schedule to the Bill.

Mark Hoban: I am sorry to detain the Committee for slightly longer, but I want to raise one or two issues that did not fall within the amendments that I tabled. The first is the inclusion within SIPPs of unquoted shares. The 1991 rules stated that SIPPs could not hold shares in an unquoted company when the pension scheme held more than 30 per cent. of those shares. This is one area where there is a deficiency in the clarity of the schedule and an example of where the old rules might be slightly clearer than the current ones.
It is difficult to wade through the schedule trying to find the rules that tackle the issue. The Government have sought to tackle it through indirect investment, which is referred to in paragraph 23. The only tangible moveable property that pension SIPPs can invest in is gold that meets particular rules or individual items taken with the administration scheme that cost less than £6,000. That appears to rule out shares in unquoted companies where a pension scheme has a particular interest.
Paragraph 21 enables direct investment in a vehicle such as a limited company holding tangible moveable property where the company is carrying out a trade or profession. However, subsections (2) and (3) prohibit that where the pension scheme, in conjunction with associated powers, has control of the vehicle or if a member of the scheme either directly or indirectly controls the vehicle.
That convoluted route effectively prevents SIPPs from holding shares in unquoted companies by preventing them from investing indirectly in tangible moveable property. While we think about computers falling within the £6,000 limit, if we are thinking about a trading company with the same machine source, it is likely that the value will be much greater than £6,000, which would preclude the SIPP from investing in the shares of unquoted companies where the members had a particular interest.
John Lawson of Standard Life said:
“It seems like they’ve deliberately snuck this in. It’s a very obtuse way of getting rid of unquoted shares, by saying any investment in a business which has tangible moveable property such as computers, desks and chairs will be subject to a tax charge if it is connected to the member”.
Will the Economic Secretary clarify the Government’s position on unquoted shares being held by SIPPs? He referred to guidance, which is already out with the industry in draft, on tangible moveable property. That is limited entirely to gold bullion. What further consultations does he expect to have with industry about what falls within the definition of tangible, moveable properties?
Turning to page 165 of schedule 21 and to one of the issues that arose prior to A-day, Her Majesty’s Revenue and Customs gave SIPP providers guidance saying that SIPPs could invest in residential properties so long as they did not become residential prior to 6 April 2006. A number of people bought property off-plan, as it were, with a view to completing after 6 April. There is sufficient transitional relief in place to allow people who bought properties in the UK before 6 April to sell them on, but in some territories, such as Florida, one can buy off-plan only once.
Schemes that have bought off-plan with a view to completing the transaction post-6 April will find that they own residential property after that date and are therefore subject to the penalties and charges set out in schedule 21. Will the Minister carefully consider the situation of schemes caught out by the change in Government policy, and will he ensure that, where schemes are unable to sell their property before it becomes residential, because of the rules in the States or whatever country the property is located in, they are not caught by the penalty charges?
I want to raise the subject of the penalty charges themselves. A number of Committee members have received a brief in which Philip Baker QC gives an opinion sought from him by a solicitor. He considered the four charges put in place in the Finance Act 2004—the unauthorised payments charge, the unauthorised payments surcharge, the scheme sanction charge and the potential deregistration charge—in the context of the European convention on human rights, particularly articles 1 and 6. I do not want to go into the opinion in detail, because it is fairly lengthy, but the nub of Philip Baker’s argument was that the charges were disproportionate given the potential mischief; that is, given the tax relief that would be paid as a consequence of investing savings in property, or as a result of indirect investment in businesses. The penalties were much greater than the tax loss, and there was no opportunity to mitigate that loss, because the charges were automatic; there was no opportunity for someone to appeal against them.
I would be grateful for the Economic Secretary’s comments on Mr. Baker’s opinion, which suggests that the penalty regime in the 2004 Act could come under scrutiny from the perspective of the European convention on human rights and could lead to pension scheme operators embarking on a significant amount of litigation at taxpayers’ expense. Does the Economic Secretary think that that is likely to happen?
There have been changes to the investment regime for SIPPs, which has become more restrictive than it was under the 2004 Act; at that time, the rules were liberalised, so the amount that a SIPP could borrow was reduced from 75 per cent. of its assets to 50 per cent. of its assets. That seems one way to choke off investment in residential property. Now that we have gone back to a more restrictive regime, do the Government have any plans to relax the restrictions on borrowing?

Edward Balls: The hon. Gentleman asks four questions and I shall try to cover all four. On the first point, which was about unquoted shares and investments in business assets, as the hon. Gentleman knows, the legislation is aimed at preventing abuse of the tax reliefs given to pension schemes for investment in assets, which may provide the opportunity for private use. The legislation ensures that such assets, held by companies and other vehicles owned by pension schemes, are also caught. If the legislation had not covered the ownership of such property by investment vehicles, that would have provided a large loophole; indeed, the legislation would have been largely ineffective. Pension schemes, for example, could have invested money in private companies that bought residential properties. A simple example would be that of a SIPP owning 100 per cent. of shares in a company that owned a flat in Marbella; that would be very little different from direct ownership.
A number of points have been made on investments in trading companies, to which the hon. Gentleman referred. First, it is said that the scope of the legislation is too broad, because it will catch genuine commercial investments in trading stock and plant and machinery used in trades for which there is no possibility of private use.
Although that may be true in some circumstances, there are also a number of occasions on which trading stock or plant and machinery used in a trade may be available for personal use; for example, fine wines, cars or residential property development. In such cases, trading stock may well be available for private use. Furthermore, assets held to provide benefit to employees may well be plant and machinery held for the purpose of the trade, but still available for private use. Those are exactly the loopholes that we want to prevent.
It has also been asserted that it would be difficult for pension scheme administrators to monitor the underlying activities of companies. We do not agree. Most trading companies in which small pension schemes want to invest are controlled by the pension scheme members themselves. The same people are often the pension scheme trustees. Also, an investment in a trading company will not be a genuine diverse commercial vehicle if only the pension scheme and those associated with it control that company or if a member of the scheme or connected person is a controlling director of the company. There will therefore always be a controlling relationship for which tax charges arise, and that will clearly allow the scheme administrator to monitor the company.
It is also asserted that a pension scheme might be caught when a scheme administrator or pension scheme member would not be able to calculate the tax charges that arise. We reject that assertion. As the hon. Gentleman said, we have issued regulations to try to ensure that we can prevent the opening up of those loopholes while allowing proper business practices to continue.
We have issued regulations that allow investment in small items of property used in the administration of vehicles owned by pension schemes. That allows investment companies to hold the general items of administration—chairs, desks, computers and so on—and therefore allows commercial investments in such vehicles with a minimal risk of using pension scheme funds to purchase assets for the private use of pension scheme members. As the hon. Gentleman knows, we have provided for an order power to define items of tangible moveable property that are not subject to the tax charge. The draft order is available on the HMRC website for comment.
We will consider the representations made on trading companies by certain sections of the industry and will consult informally on the draft order. I hope that we will take up some of the hon. Gentleman’s concerns, and some of the detail, in those more detailed consultations.
I say to the hon. Gentleman that until now we have not had representations on the issue of transitional relief and the difficulties of international property investment. If there are concerns about those points in the industry, HMRC will be happy to talk to pension schemes or the individuals concerned, but cannot guarantee that they will not come within the provisions. Obviously, that will depend on the facts and circumstances. However, we are happy to have discussions to ensure that the concerns raised with the hon. Gentleman are picked up. However, so far the issue has not been raised with us.
The hon. Gentleman’s fourth point was about reducing the borrowing limit for SIPPs from 75 per cent. to 50 per cent. The previous borrowing limit allowed borrowing only of a specific asset type—for example, commercial property plus some short-term borrowing. The short-term borrowing limit was trailed in the consultation documents on simplifying the taxation of pensions. Of 200 respondents to the second consultation, only 20 specifically mentioned that they believed the level of 50 per cent. for scheme borrowing to be too low.
A number of people in the industry have taken a different view. Stewart Ritchie of Scottish Equitable has commented that 75 per cent. is too high, being a potentially huge proportion of the funds; he actually favours such restrictions. If there are representations about the new regime in practice, we will look at them, but so far the majority of respondents to the consultation have not raised that as a problem—and some have supported the reduction in the limit.
The final point is about the European convention on human rights and the opinion of Philip Baker QC, which has been circulated to the Committee. Tempted as I am to dwell upon the irony of the hon. Member for Fareham using that convention to probe whether the Government are being overly intrusive in impinging on the human rights of individuals in Britain, Sir John, I fear moving into a broader debate about whether the convention and its incorporation here has been an advance, or whether we would prefer to return to a previous era. I presume that I would be ruled out of order were I to stray too far down that road. So, I will not dwell on the irony of that point but will stick to the substance if that is OK with you, Sir John.
Philip Baker makes a number of points. Generally, it would be fair to say that he, as an individual practitioner in this area, has not been overly enamoured of the Government’s attempt to ensure prevention of tax avoidance in these areas. Therefore, on the content of the legislation and the importance of acting in this area he probably takes a different view, as a matter of principle, to that of hon. Members on both sides of the Committee. There are some more detailed points in his opinion. We have looked at those issues and, contrary to what Mr. Baker says, in our view in both measures that he addresses—the issues of provisions in this order in schedule 21, and the recycling provisions which we will come to shortly—we have struck a fair balance between protecting the rights of the individual taxpayer and safeguarding the public interest, by ensuring that the general body of taxpayers bear no undue burden.
These are generous reliefs and it is important that they are not abused by some who seek to make them even more so. We have a clear duty to protect the general body of taxpayers. It would be wholly unfair to them if an individual were able to receive these generous reliefs on pension saving—on the clear understanding that they were to be accumulated and invested prudently to produce a retirement income—when they were in fact being used to buy a yacht, fine wine or an expensive coastal beach hut. In our view, that would not be right; nor would it be right if some should seek to double up a relief without putting in any more general additional pension savings. We will come to those issues in a moment, but in both cases we have put in place provisions which encourage people to stick to the rules. They provide for a range of tax charges to apply in particular cases and are proportionate to the mischief that they seek to address. In my view, while he is well intentioned, Philip Baker QC is not right to accuse us of not striking the right balance.
Having spent a considerable time some years ago on the issue of windfall tax on private utilities, I note that my sense is that when it comes to making tax policy, a sovereign Parliament has substantial powers and responsibilities, but also latitude to ensure that so long as legislators move correctly through parliamentary processes that this matter remains sovereign to Parliament. Personally, I think that right and proper. It should be for Parliament to make those decisions, so long as they are done in an open, transparent and fair manner and that we strike the right kind of balance. That was undoubtedly so in the case of the windfall tax. Lawyers said that a legal challenge could arise but when people looked at the detail they concluded that it would not. That was why, despite a years’ scaremongering, when it came to it no such legal challenge arose.
The Bill is also clearly well intentioned in aiming to protect the British taxpayer. That is being done in an open and consultative way, and I hope and believe that it will have support from both sides of the House. We have struck a careful, fair and proportionate balance. On that basis, the right thing for us to do, as Members of a sovereign Parliament, is to agree to the provisions.

Mark Hoban: I thank the Economic Secretary for his remarks. I would have been much more nervous had my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) been here, because he would have questioned my use of the ECHR rather than the Economic Secretary’s breathtaking irony. I am delighted that he is sure of the penalty regime’s correctness and confident that it will withstand all challenges. We look forward to that proving to be the case.
On the transitional reliefs, I note the Economic Secretary’s remarks on property being bought off-plan, pre-A-day. I am sure that they will have been noted. On borrowing, I welcome the fact that he talked about the consultation process that had gone on prior to this legislation and the support for the existing borrowing limits.
On the unquoted shares, according to the Economic Secretary’s explanation, it seems that the problem started when the rules were relaxed in the Finance Act 2004 and we had investment in the pension Picasso, the pension Porsche, the pension penthouse and so on. He said that he will consider representations from the industry on that. In trying to stamp out one particular set of abuses, we must be careful that we do not deprive SIPPs of the opportunity to invest in other assets where they might feel it to be in their interest. I hope that the industry takes up his offer of consultation.

Question put and agreed to.

Schedule 21, as amended, agreed to.

Clause 160

Recycling of lump sums

Mark Hoban: I beg to move amendment No. 141, in clause 160, page 134, line 39 [Vol I], leave out ‘because' and insert ‘following the receipt'.

John Butterfill: With this it will be convenient to discuss the following amendments: No. 142, in clause 160, page 135, line 1 [Vol I], leave out ‘envisaged' and insert ‘intended'.
No. 143, in clause 160, page 135, line 7 [Vol I], leave out ‘1' and insert ‘10'.

Mark Hoban: The Economic Secretary alluded to the clause in his remarks in the schedule 21 stand part debate. The clause is interesting and perhaps I should explain a little of the background. It appears to be quite a sweeping clause as it lays a charge of 55 per cent. on the pension commencement lump sum of people who make a significant increase in their pension contribution having already received the lump sum or in the knowledge that they will receive a high lump sum in the future.
The provision could capture a great deal of pre-retirement pension planning, as anyone who makes a significant contribution to their pension prior to retirement will do so envisaging that it will lead to a higher pension commencement lump sum. A pension commencement lump sum is what was hitherto referred to as a tax-free lump sum that people received when they retired. The provision could lead to a situation in which someone who makes a significant increase in his pension contributions prior to retirement gets taxed on the lump sum because he knew that making a significant increase in his contribution would lead to a higher pension commencement lump sum. We are talking about a perfectly reasonable form of pension planning.
That is, in a nutshell, how the clause works. Having said that its effects are quite sweeping, its broad effects are mitigated by 28 pages of non-statutory guidance notes that act to restrict it. Take away those guidance notes and many people could be swept within its scope. 
It has been possible for people to recycle lump sums as contributions to pension schemes since at least 1988 and possibly as far back as 1956. All that they must do is take the benefit and reinvest the tax-free lump sum as a pension contribution if they have unused allowable pension contributions. Historically, it was not much of an issue, as the limits on pension contributions as a percentage of earnings were relatively low and based on age, although there was a nuance whereby people could carry forward six years of unused contribution relief for retirement annuities.
By lifting the cap on contributions and making it much easier to withdraw lump sums from pension funds, the A-day regime has created an opportunity for people to reinvest those lump sums in pensions. They can effectively invest 100 per cent. of their salary in a pension fund in any particular year, and the unsecured income option allows them to take the cash and still draw no income at all. They do not need to take their pension benefit when they withdraw the cash and reinvest it in a lump sum. It does not take a genius to realise that there is a big potential for tax loss.
For example, if someone has a £400,000 scheme, they could withdraw £100,000 and invest it in a new scheme, gaining tax relief for £40,000. From thatnew £100,000 pension fund, they could extract a further 25 per cent., or £25,000, invest that in a new pension fund and receive tax relief at 40 per cent.—a further allowance increase of £10,000. The process can go on iteratively until the money is exhausted.
Clause 160 and the 28 pages of guidance seek to tighten up the rules to prevent the alleged potential for widespread abuse of recycling by preventing people from withdrawing lump sums from their pension funds and reinvesting them. The change was heralded in the 2005 pre-Budget report, which stated:
“action will also be taken to prevent abuse of the rules for tax-free lump sums from 6 April 2006. The legislation will remove tax advantages where lump sums are recycled back into funds in order to generate artificial levels of tax relief.”
The draft legislation has put that into effect. The pre-Budget report announcement suggested that we should tackle those abuses.
According to the details of the rules, a scheme can make an unauthorised payment if several conditions are satisfied. The pension commencement lump sum received must exceed 1 per cent. of the standard lifetime allowance, which is currently £1.5 million—in other words, the lump sum must be £15,000 or more. The additional pension contribution must exceed 30 per cent. of the lump sum and must be a significant increase in the contributions paid. Also, the taxpayer must have envisaged that the lump sum would have led to a significant increase in contributions at the relevant time.
From looking at the pre-Budget report announcement, I would assume that the sequence envisaged was the receipt of a lump sum followed by the payment of a significantly increased pension contribution. However, the Bill’s definition of “relevant time” means that an individual can make the significantly increased pension contribution and then receive the pension commencement lump sum.
The sequence works both ways. A person can either receive a lump sum and reinvest it to get the tax relief or make significant contributions now in the knowledge that they could receive a significantly enhanced pre-commencement lump sum later. It is the latter sequence that causes a problem, because it captures what people might think is legitimate pre-retirement tax planning.
Revenue and Customs has recognised that that could have an impact on ordinary retirement planning. Its guidance notes include four paragraphs on pre-planning—less than one page out of 28 to tackle an issue that is difficult to identify. It says in paragraph 4.4:
“There must be pre-planning for the recycling rule to be triggered, an individual will know that a conscious decision has been taken to use a pension commencement lump sum as a direct or indirect means to pay significantly greater contributions to a registered pension scheme.”
That seems quite clear, but let us consider three examples to help illustrate the divergence of the broader circumstances.
Let us consider Mr. B of Westminster, who is planning to retire shortly. He might decide to increase his pension contributions, knowing that that will lead to an increased lump sum. The language of the 2004 Act suggests that he envisaged that that would be caught, but the meaning of the guidance notes is clear: it would restrict the application of the provision, because although he knew about it, he did it and nothing seemed to happen deliberately.
If the same Mr. B took out a pension commencement lump sum and reinvested it in another pension fund, assuming all the other conditions were met, in terms of the amount withdrawn and the change to the contribution package, HMRC would say that it was recycling and would levy the additional charge. But what if Mr. B decided to sell a flat and put the proceeds in his pension fund, rather than topping up his savings, knowing that he would, as a consequence of investing that money in his pension fund, receive a higher pension commencement lump sum to replenish his savings? He knew that the investment would lead to a higher pension commencement lump sum and that he did not need to put the proceeds of the sale in his savings, because he would be able to withdraw that lump sum later and replenish his savings that way. There is a relationship: he knew that he would draw a lump sum out in future, so why should he tap into the savings now? Why should he not use the proceeds from the sale of the flat to top up his pension scheme? He would have entered into an arrangement apparently in the knowledge that it would lead to an increase in his contributions. I am not sure how that would be treated. It seems to be a legitimate approach, but it does not satisfy either of the polar cases that I mentioned at the outset: it was neither a straightforward transaction made on his income, nor did he take any money out of his pension commencement lump sum.

Rob Marris: The hon. Gentleman mentioned the relevant time, which is defined in the clause. It refers to
“paragraph (a) of sub-paragraph (2)”.
It does not refer to paragraph (2)(b), which deals with the “envisaged” point that the hon. Gentleman is making.

Mark Hoban: The hon. Gentleman makes an interesting point and it illustrates the complexity of the rules: a relatively straightforward, short clause needs to be explained by 28 pages of guidance notes. It is a sweeping clause that causes a problem with the sequencing of events.
The amendment would restrict the clause so that it only tackled circumstances where the lump sum is received and recycled. It does not take into account situations where contributions are increased with the intention that a higher lump sum will be received in future; it considers recycling as set out in the PBR measure, which proposed that there would be a clear sequence—receive lump sum and invest—rather than any other relationship.
Amendment No. 143 would restrict the scope of the clause by lifting the threshold for investigation from1 per cent. of standard lifetime allowance to 10Â per cent. This is a probing amendment. The £15,000 threshold is potentially quite low and could lead to a significant burden on administrators and others who are trying to identify contributions that have been made. I wonder whether that is too low and does not focus on wide scale abuses, and whether it will pick up a wide range of pre-retirement planning in a grey area. We need to recognise that the taxation consequence of breaching the clause is a 55 per cent. charge on the pension commencement lump sum and is not based on the additional contribution that a member might make to the scheme.
I do not know whether 10 per cent. is the right level or whether it should be varied between 1 and 10 per cent., but I would like the Government to explain why1 per cent. has been chosen as the right level. Is there a better a level that would not pick up a relatively low level of transactions that were not directed towards abusing the recycling regime?
I have a broader concern. This is a short clause with extensive guidance notes attached to it that do not have statutory status. They could be changed and amended. My concern is that the breadth of this clause is so great that there need to be stricter and more tightly defined regulations underpinning it that the House can discuss. Otherwise the Government could at some stage in the future withdraw the guidance notes and allow the clause to have its full effect.
Finally, could the Economic Secretary guarantee that the provision does not affect the tax-free status of the lump sum? This is one of the first times in which that status has not been used in legislation and there is reference to a pension commencement lump sum. The sweeping nature of this clause may lead to tax charges being levied in the future and I would welcome the Economic Secretary’s clarification that the intention behind this clause is not to remove the tax-free status of that sum.

Edward Balls: The answer on that last point is no; of course, that is not the intention and that has been made clear in the pensions White Paper and by me today. The new pensions tax regime, which we have put in place since 6 April, will make it easier for people to invest for their retirement using tax relief by lifting the limit on contributions. Individuals can save as much as they like, where they like in registered pension schemes, with annual tax relief on contributions limited to the lower of 100 per cent. of earnings or £215, 000.
We became aware of the potential within these new, generous and less restrictive rules for a systematic exploitation that could lead to potentially generous and substantial amounts of tax relief being diverted through a device known as recycling or turbo-charging. Under this device, an individual’s tax-free lump sum is put back into a pension scheme as a further tax relief contribution.
To explain how turbo-charging occurs, let us consider an individual with a pension pot of £100,000 who takes a tax-free lump sum of £25,000, leaving £75,000 in his pension pot. He then puts the lump sum back into the pension scheme as a contribution, and this picks up a basic rate relief of £7,051 on the way back in. He also gets a further £5,769 in higher relief in his pocket. If he stops there, he has inflated his pension pot from £100,000 to more than £107,000 and has got a further £5,769 in his pension pot, all from the same money going round in a circle and picking up Exchequer relief funds on the way. He can go further if he wishes by putting his higher-rate relief back into the pension pot as well, and he could also repeat that cycle to get further relief and inflate his pot even more. I am not sure whether there is a technical term for that. It may be called repeated reverse turbo-charging. [Interruption.] Or reheated turbo-charging, perhaps.
What I need to clarify is that we believe that very few lump sum payments will be affected by the rules that we are putting in place to deal with this issue. I am grateful to the hon. Gentleman for allowing me to correct a fundamental misconception. Some people have wrongly assumed that our aim is to prevent individuals from putting additional contributions into their pension schemes late in their working lives to fulfil a shortfall in their fund and ensure that their pension benefits pay out as much as they have been hoping for. That is something that we want to encourage. We are happy for individuals to put genuine additional money into their pension funds, including lump sums.
The recycling measure does not aim to catch or prevent that behaviour. It aims to catch individuals who deliberately take their tax-free lump sum in order to put it back into a registered pension scheme and generate additional tax reliefs through an artificial circulation of the same money, and it will catch them only if that happens in a structured and pre-planned way. We were keen to deal with the misconception, and that is why we produced a substantial amount— 28 pages, as the hon. Gentleman said—of guidance for what is, as he said, a short piece of legislation.
The guidance, however, does not seek to add to, amend or change the intent of the clause. It aims to make it clear that the cases that some people have feared might get caught inadvertently will not be caught. The intent of the legislation is absolutely clear. That is why the Chartered Institute of Taxation concluded:
“HMRC have consulted effectively on these changes; the resulting rules”—
that, I think, means both the clauses and the guidance—
“seek to separate structured tax avoidance from accidental or insignificant increases to pension fund payments, while the guidance includes a lot of excellent worked examples.”
The fact that there are 28 pages of guidance is evidence of the fullness as well as the excellence of those worked examples. They are there to make clear what we are attempting to do, which is to stop recycled turbo-charging or reverse and multiple turbo-charging, without trying to disadvantage people genuinely trying to top up their pension funds.
We have had to act in that way with the legislation and guidance because the simplification and shift in more generous limits, as a result of the A-day reforms, means that, although in the previous regime past restrictions made it difficult for deliberate tax avoidance through turbo-charging and reverse multiple turbo-charging to occur, the matter could conceivably arise in our new more light-touch and deregulated pension tax regime. Through the use of guidance in the clause, we wanted to make clear that that tax avoidance would not be allowed.
The hon. Gentleman spoke to three different amendments. Amendment No. 141 would effectively allow individuals to step around the anti-recycling provisions quite easily. As drafted, the provision ensures that it is not possible to get round the anti-recycling rule by making additional contributions before taking the lump sum—for example, by funding them with short-term borrowing to be repaid when a lump sum is received. That potential means of sidestepping the rule was touted around in the specialist press even before the draft legislation was published. Such pre-emptive multiple turbo-charging is something that we are not minded to allow to occur, but the amendment would allow it to happen. That is why I urge the hon. Gentleman not to press it.
Amendment No. 142 seeks to replace the word “envisaged” with “intended.” The hon. Gentleman explained why. Twenty years ago, in studies on the philosophy of mind, which were part of my degree, I read an interesting book by Professor Davidson from the University of California, called “Actions, Reasons and Causes”. It isan excellent and forward-thinking book in which almost the entire text of 300 to 400 pages focuses on the use of terms such as action, reason and intention. As those who have studied those terms will know, they have quite different meanings.
A desire to do something is different from an intention to do something. An intention is a narrower and more purposeful word. I might like, desire or hope to do something, but to intend to do somethingimplies a degree of pre-planning and foresight, and of structuring one’s behaviour in order to go down a particular road. It is different from the word “envisage”, which has a broader meaning. This philosophical discourse on the meaning of “intention” is, I hope, relevant to our broader debate on tax policy. I must say that I never realised back then that Professor Davidson’s book would become useful in a Finance Bill Committee for multiple reasons that I shall not dwell on.
When drafting the Bill, we considered the issue and consulted with lawyers—but not philosophers. However, we have seen in this Committee that it is possible to be a Member of Parliament and a lawyer; presumably it is possible to be a Member of Parliament and a philosopher, or even a lawyer and a philosopher, and therefore to have a philosophical, as well as a merely legal, discussion about the use of “intention”. In the case of recycling, in which a lump sum is taken, the term “intended” is used and—I go back to my earlier remarks about the philosophy of mind—that suggests that the individual must actively plan the recycling on the date that they receive the lump sum. If I intend to go to the zoo, one would assume that I know the date on which I am going; I may have even made a plan. A desire to go to the zoo would mean that I will perhaps go at some point over the summer.
An intention would normally imply a degree of active planning around the receipt of the lump sum, and that means that a case where the recycling had been planned and set up before that date so that no further action was necessary on the part of the individual on the date itself, might not be caught. Similarly, a case where an individual had made arrangements for someone else, such as an employer, to make additional contributions might not be caught. However, in such a case, the individual may not be “intending”. “Envisaging” is a broader term; it might be an intention on behalf of someone else, rather than a personal intention. “Envisaging” may mean opening up the possibility that someone else may use the provision—in this case, to recycle the lump sum on that date. If “envisaging” were used, that case would be caught. The difference between “envisaged” and “intended” is subtle but essential. “Envisage” will cover the concept of intention, as sought by the amendment, and will go a little wider, so as to ensure that we catch all necessary cases.
I am sure that the hon. Gentleman will have reflected on those issues when drafting the amendment, but I urge him to reflect further and agree that we cannot risk a change that might render the legislation ineffective against some of the most offensive pre-planned cases of recycling. In some of those cases, the word “intention” may not be the most appropriate way of catching the action, reason and cause in question.
Finally, turning to amendment No. 143, the recycling legislation has been carefully framed to strike a balance between deterring recycling activity, catching the more blatant and artificial cases and leaving unaffected those smaller pensions savers and those going about the normal business of retirement planning. To achieve that balance, we have included a threshold of 1 per cent. of standard lifetime allowance, or £15,000 in a tax year. Individuals taking total lump sums of no more than that amount in a 12-month period will not be caught by the rule. The amendment would increase that threshold tenfold from £15,000 to £150,000.
Given the generosity and flexibility of the A-day regime, introducing that further substantial increase in the threshold would be unnecessary and would make the legislation ineffective in all but the most exceptionally large cases. It would not provide an effective deterrent against recycling activity, because the majority of people using deliberate and planned recycling and tax avoidance schemes would know that they could safely do so within the ambit of the legislation as a result of the hon. Gentleman’s amendment.
The proposed threshold of £15,000 already carves out the majority of pension savers. To go further,from £15,000 to £150,000, would be grossly disproportionate. We think that we have struck the right balance, allowing small pensions savers not to trigger recycling rules, but catching the medium and larger potential multiple and turbo-charging recyclers. On that basis, we urge the hon. Gentleman to withdraw the amendment.

Mark Hoban: I did not appreciate when I started on the Finance Bill that, as well as seeking advice from accountants and pension experts, I would need to seek the guidance of philosophers. If only I had, I would have come up with a more elegant rebuttal of the Economic Secretary’s way of distinguishing between “envisaged” and “intended”. Without wishing to do a disservice to him, it is perhaps just as well that it was his officials who drafted the guidance notes. We would have had a much more weighty philosophical treatise landing on the desks of pension advisers if he, rather than his officials, had done so.
In a way, the Economic Secretary undermined his arguments. He said that the Bill was trying to capture structured and preplanned tax avoidance. I was struck by that. When he read from Professor Davidson’s book—or recalled chunks from memory—the explanation of “intended” mostly aligned with the definitions that he had given himself. “Intended” would appear philosophically to be the right word, since structured and preplanned tax avoidance was going on, rather than vague “envisaging”.
“Envisaged” is too vague a word. The Economic Secretary gave the reasons, because the measure is about capturing preplanned and structured tax avoidance, not some vague whim or thought about what should happen.

Rob Marris: Planning and preplanning seem to be the same thing. Did the hon. Member for Fareham envisage the response of the Economic Secretary, or did he intend the response?

Mark Hoban: That is a good one. I thought that the Economic Secretary’s response would be intended, in the sense that it would be planned and structured. The line between “envisaged” and “intended” is difficult to draw, but given that he is seeking to capture structured transactions that aim, through recycling, reheated turbocharging or whatever, to lead to tax avoidance, “intended” is better than “envisaged”.
I do not dispute the Economic Secretary’s view that the guidance notes are good—he used the word “excellent”. There are 21 examples in those guidance notes that give a flavour of what the Government are seeking to capture. He is right that the guidance notes are not seeking to expand the scope of the legislation—far from it. They are restricting the legislation. They are making the clause much tighter and clearer for its application and narrowing the scope significantly, trying to highlight the circumstances that would be captured. Separating the clause and the guidance notes is difficult, because without the guidance notes the clause would have far wider ramifications than is intended at the moment.
My concern is that looking at the clause and notes together today is all very well, but in six months’ or one or two years’ time those guidance notes could change, relaxing the narrow scope now given and leading to wider transactions being caught within the clause, causing unintended mischief. The problem is that the guidance notes will not come back for scrutiny to this Committee, or to another Committee of the House. They can be changed by Revenue and Customs, or at its behest, with or without consultation with the industry. That is what I am most concerned about.
This is our only chance to debate the clause and the guidance notes. Much more of the Minister’s thinking should be in either the primary or the secondary legislation, rather than tucked away in guidance notes, which can be changed at whim without a decision of the House. That is my principal concern. Although I shall withdraw the amendment, I hope to come back with some further thoughts on the matter on Report because the House needs more control over what is happening to pension funds, while less control needs to be delegated to the civil service, no matter how good its members are at drawing up regulations and guidance notes. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Rob Marris: The difficulty with turbocharging or recycling arose when we introduced the £1.5 million lifetime pension pot and the contributions regime of £215,000 or 100 per cent. earnings in a given year, whichever was the lower figure. The financial press started talking about recycling and so on. A long time ago I wrote to the Paymaster General about the problem and I wish to thank her publicly for clause 160, although I am sure that it was not a direct consequence of my letter. Other people made representations about the matter because the loophole seemed huge and one to be exploited almost invariably by the very rich, those with the huge pension pots. I thank her for dealing with the matter under clause 160.

Edward Balls: To defend philosophers, the point of philosophy is to be precise and, thus, to be sparse. Casting a philosophical eye on such matters sometimes leads to greater efficiency of language, rather than a proliferation of terminology. It is also important to get matters right. In our view, “intention” was too narrow. I assure the hon. Gentleman that, if significant material changes are made in the guidance, I shall make sure that they are circulated to the Opposition so that they have a chance to comment on them. I shall take advice to make sure that we continue to take a consultative approach to guidance issues.

Question put and agreed to.

Clause 160 ordered to stand part of the Bill.

Clause 161

Raising of thresholds

Question proposed, That the clause stand part of the Bill.

Mark Hoban: We have just touched on two issues. I expect that the Economic Secretary probably had prior notice of both of them as they were set out in briefing supplied by the Institute of Chartered Accountants in England and Wales. I refer first to the interaction of inheritance tax and income tax charges. Under the Finance Act 2004, rules were introduced to set up alternatively secured pensions to meet the objection to annuities of members of Plymouth Brethren. They enabled people to draw down income from their pension fund after the age of 75 rather than by an annuity.
Under the mechanism that the Government put in place, on the death of a pension fund member, leftover funds that can be left to a surviving spouse. If they hold the same view on annuities or choose not to buy an annuity, there will be leftover funds for other dependants. A series of tax consequences arise from the timing of a death of a pensioner and their spouse and from the use to which the fund was put at the time of death.
Let me give five examples of such circumstances. First, if Mr. Jones dies before he takes any benefit from his pension fund—Mr. Jones being a member of the scheme—the fund is under discretionary disposal and free from inheritance tax. That is clear. If Mr. Jones died when he had started to take unsecured income, but before the age of 75, and if the fund had not paid out a lump sum, income tax would apply.
Sir John, I appreciate that I should have spoken about these matters under the schedule stand part debate.

John Butterfill: Order. I was coming to that conclusion myself. Does the hon. Gentleman wish to have such a debate on schedule 22 stand part, or does he want to have it now? The clause is purely an enabling clause. I shall leave that to his discretion, but he cannot have the discussion twice.

Mark Hoban: Sir John, at this stage of what I thought was the final sitting, I do not wish to debate such matters twice. I apologise for having been too keen and eager to participate in the debate. I hope that I have your leave, Sir John, to continue on this matter. I promise not to recycle my remarks.

John Butterfill: Order. It is probably best if we simply deal with the enabling clause immediately and then move to schedule 22, to which, in any event, there is an amendment.

Question put and agreed to.

Clause 161 ordered to stand part of the Bill.

Schedule 22

Pension schemes: inheritance tax

Amendment made: No. 381, in schedule 22, page 176, line 40 [Vol II], at end insert—

‘Interest

8A In section 233(1)(c) (interest on unpaid tax), for “or 126” substitute “, 126 or 151B”.'.—[Ed Balls.]

Question proposed, That this schedule, as amended, be the Twenty-Second schedule to the Bill.

Mark Hoban: I apologise to Committee members for the confusion that I inadvertently created. I am not sure how those transcribing the proceedings will cut and paste what has happened into the report. To recap without recycling the points that I have made, I was elaborating on the five circumstances that relate to the interaction between income tax and IHT in respect of alternatively secured pensions.
My second example is that if Mr. Jones should die once he had started to take his unsecured income, but before age 75, the fund would be paid as a lump sum and a 35 per cent. income tax charge would apply. The third circumstance is that if he should die once he had gone into the alternatively secured pension, no tax charge would arise as long as he had nominated his spouse to receive the fund into her SIPP.
The fourth example is that if Mrs. Jones died before age 75, the leftover fund would be paid out and subject to a 35 per cent. income tax charge. However, because the fund would have derived from Mr. Jones’s alternatively secured pension, inheritance tax would apply as well. The inheritance tax charge would take precedence and apply before the income tax charge, and the effect would be a combined tax burden of61 per cent. If, however, Mrs. Jones died after age 75, having used the ASP, the leftover fund—the one transferred to any dependants—would be subject to inheritance tax. There are varying tax rates. Is the intention behind the schedule to give rise to an effective 61 per cent. tax rate in the circumstances that I identified in my fourth example?
My next brief point is about requirements. Paragraph 2 of the schedule legislates for an existing Revenue and Customs concession, which exempts a pension fund from IHT when the member who died before age 75 had yet to buy an annuity. However, that exemption does not apply if members are in poor health; the suggestion might be that they had deferred the annuity to maximise the death benefit. That provision would apply when the decision to defer taking the annuity was made within two years before death.
The question asked by the ICAW is what steps beneficiaries and executors need to take to establish what the deceased knew about the state of their health when they decided not to take an annuity. It might be rather difficult for them both emotionally and otherwise to establish what the deceased knew at any point in time. Will the Minister set out what would be acceptable information in those circumstances?

Julia Goldsworthy: I have a brief point about new section 2C of the Inheritance Tax Act 1984, which follows from the remarks of the hon. Member for Fareham. Will there be no inheritance tax charge if the individual dies before 75 and passes the inheritance on to his partner, spouse, dependant or a charity, or if the individual chose not to take his pension when in good health? Where does the burden of proof lie for the motives of the deceased. and what records does the Minister expect individuals to keep with regard to understanding their medical position, which clearly could be an additional burden? Will people be exempt only if they can provide that proof, or will the assumption be that they did not have that knowledge beforehand?

Edward Balls: Clauses 161 and schedule 22 set out the inheritance tax rules for choices made by members of registered pension schemes on or after 6 April 2006. In broad terms, the measures provide that longstanding inheritance tax rules for scheme members under the age of 75 will continue to apply as before, so in most cases there is no inheritance tax to pay. For those over 75, the measures bring the alternatively secured pension option within the IHT framework and will come into effect from 6 April for consistency with other pension simplification measures.
The Committee will recall that the ASP has a new option available for A-day for scheme members aged 75 or over. Some people have principled religious objections to the mortality risk inherent in annuities. ASPs were designed specifically to enable those with such objections to benefit from tax-privileged pension savings.
It may help the Committee if I give a little background information. We were asked last year to clarify how the IHT rules would apply to pension choices post-A-day. That followed widespread media speculation that wider choices open to members under the new post A-day pension rules would provide opportunities for IHT planning. We launched the discussion exercise with key industry stakeholders about how the existing IHT law could be applied to the choices under the new pension rules. We are grateful to all who responded to HMRC’s discussion paper. Their comments have materially affected us in finalising the new rules.
The responses confirm that, without change, IHT will arise in situations that were IHT-free in the past. The broad consensus with the longstanding IHT rules should continue for scheme members under 75, and new rules should be introduced specifically targeted at leftover funds and ASPs. We agree that that is a broad approach and is what the provisions achieve. Generally death benefits under pension schemes are IHT-free for scheme members under 75, but an IHT charge can arise in certain circumstances under a pension scheme where a general IHT anti-avoidance rule is triggered. The rules are complex: they interact with the state of the scheme and members’ health. There are two particular instances that relate to the deferral of the scheme member’s pension, where in practice an IHT charge is not taken under the resulting enhanced death benefits.
One is where death benefits are paid to the scheme member’s bereaved spouse or civil partner or their financial dependant. The other is where the scheme member was in good health when they first admitted to draw their pension, so no IHT charge was triggered, but despite a subsequent deterioration of their life expectancy they simply continued to defer their pension. We are legislating so that concessionary practice for the anti-avoidance charge continues not to be triggered in those circumstances, and where death benefits are paid to a charity we are ensuring that they, too, are IHT-free.
The other aspect of this measure sets out the IHT rules where scheme members die with funds in an ASP. They restrict control over the amount of income that they withdraw under ASP rules. That means that there must almost always be funds left over on the scheme member’s death, and it is necessary to bring those ASP funds within the IHT framework in a way that is consistent with the existing rules. This measure means that there will be no IHT charge on any ASP funds paid in one of three ways: to provide pension benefits for the scheme member’s spouse or civil partner; to provide such benefits for any person who is financially dependent on a scheme member at the time of his or her death or whether funds are paid to charity, or else IHT will be charged with the leftover ASP funds where a scheme member dies; or on any funds left over where a dependent’s pension benefits cease, except where on the death of a dependant they are paid to charity. Scheme administrators will be responsible for paying and accounting for the tax to HMRC. We are working closely with the industry to strike an appropriate balance.
As the hon. Member for Fareham mentioned, we have had consultation with some religious groups about whether it would be possible for there to be particular and special treatment for them. The Plymouth Brethren are one such example. They have contributed to the HMRC consultations on the IHT changes, and we have carefully considered their comments. We are clearly sympathetic to the principled religious objections that they have set out. Indeed, they were part of the thinking behind this whole area of legislation.
However, we cannot simply carve out specific groups from tax. Leftover funds can be given tax-free to charity, but we cannot have particular and specific carve outs relating to members of a specific religious group. We are sympathetic to the position. We have tried our best to ensure that this is a general provision that allows us to be sympathetic to particular concerns and beliefs, but we cannot have a particular carve out for those groups. As I said, ASP leftover funds can be given tax-free to charity.
The hon. Member for Hoban—

Mark Hoban: Fareham!

Edward Balls: I mean the hon. Member for Fareham; I feel as if we have been here before. He reminds me that it is important to be careful in the use of language, which takes us back to our preceding philosophical discussions. I clearly made an unintended and unenvisaged slip for which there was no reason or cause. All I can do is ask the Committee’s leave to withdraw it.
The hon. Member for Fareham asked about two particular points. One was whether we are imposing a double tax charge and whether that is our intention. The answer is no. There is nothing new in what we are doing. The particular instances that he set out could have arisen in the pre-A-day situation as well. For example, overlapping charges could have arisen where an unsecured pension was paid out as a cash sum to the member’s estate, attracting both a pension scheme tax charge and an IHT charge. Depending on the options chosen, the tax charges cannot overlap in two circumstances where leftover ASP funds are involved. One is where funds are refunded to an employer and the other is where remaining funds are paid out as a cash sum on the death of a dependant under the age of 75.
There are choices in the pension rules on how pension funds can be used, so no one is forced down a particular road. Generous tax reliefs are given to provide a secure income on retirement, and where ASP funds are paid other than for that purpose there is no reason why tax charges should not apply.
The second issue that the hon. Member for Fareham raises is whether we are imposing unfair or unreasonable burdens of proof on executors. No changes are proposed to the previous HMRC approach. The evidence of health requirement will continue to be operated on the same lines as have applied under tax bulletin 2 since 1992. HMRC is fully aware that this is a sensitive area. We also need to act in a sensitive manner, but this process has operated in a relatively smooth way under the previous practice. We have no reason to think that these legislative provisions will operate any differently.
Depending on the hon. Gentleman’s view, he will be either pleased or concerned to note that we will be publishing updated guidance on these matters on the post-IHT A-day rules. The hon. Member for Falmouth and Camborne (Julia Goldsworthy) also raised this issue. The answer is that, in terms of the burden of proof, things will operate as they have done in the past. We will ensure, through guidance, that there are no undue bumps along that road.

Rob Marris: May I draw the Economic Secretary’s attention to the wording on page 172? The word “actually” in proposed new subsection (2B) is inelegant and redundant and should not be included.
More importantly, I ask him to re-examine the wording further down the page in proposed new subsection (2C)(b), because I fear that the liberal use of negatives means that it has the reverse effect of what he intended. It may be simply that I am not able to read it well because it so inelegantly worded, but I ask him to look at again—not today, but later—as I think that the wording is wrong.

Mark Hoban: I am grateful to the Minister for saying that he will look at alternatively secured pensions and the record-keeper requirements. Confusing my surname for the name of my constituency is an easy mistake to make. It is a mistake that I shall not make in the case of the Economic Secretary to the Treasury, the hon. Member for Normanton (Ed Balls).

John Butterfill: Did you wish to reply, Mr. Balls?

Edward Balls: indicated dissent.

John Butterfill: Probably just as well.

Question put and agreed to.

Schedule 22, as amended, agreed to.

Clause 162 ordered to stand part of the Bill.

Schedule 23

Stamp duty land tax: amendments of Schedule 15 to FA 2003

Amendments made: No. 394, in schedule 23, page 180, line 36 [Vol II], leave out lines 36 to line 42 and insert—
‘(a) where no employment of the member to which the pension scheme relates is or has been other than contracted-out employment by reference to the pension scheme, is 125% of the rate of the basic pension at that time or such higher percentage of that rate as the Treasury may by regulations prescribe,
(b) where no such employment of the member is or has been contracted-out employment by reference to the pension scheme, is 250% of the rate of the basic pension at that time or such higher percentage of that rate as the Treasury may by regulations prescribe, and
(c) otherwise, is such percentage of the rate of the basic pension at that time falling between the percentages for the time being specified under or by virtue of paragraphs (a) and (b) as the Treasury by regulations prescribe;
and regulations under paragraph (c) may prescribe different percentages for different cases.'.
No. 395, in schedule 23, page 183, line 13 [Vol II], at end insert—
‘(4) In sub-paragraph (7), for “an amount crystallised by” substitute “the relevant amount in the case of”.'.
No. 396, in schedule 23, page 185, line 32 [Vol II], at end insert—

‘Amendments and transitionals

32A (1) Section 281 (minor and consequential amendments) is amended as follows.
(2) After subsection (2) insert—
“(2A) The Treasury may by order make in any relevant enactment such amendments (including repeals and revocations) as may appear appropriate in consequence of, or otherwise in connection with, any amendment (or repeal or revocation) made in this Part by any enactment contained in an Act passed after this Act (an “amending Act”).
(2B) For this purpose a relevant enactment is—
(a) an enactment contained in an Act passed, or
(b) an instrument made,
before the passing of the amending Act or in the Session in which the amending Act is passed.”
(3) In subsection (3), after “(2) insert “or (2A)”.
(4) After that subsection insert—
“(4) An order under subsection (2) or (2A) may include provision having effect in relation to times before it is made if it does not increase any person's liability to tax.”
32B (1) Section 283 (transitionals and savings) is amended as follows.
(2) After subsection (3) insert—
“(3A) The Treasury may by order make any transitional provision which may appear appropriate in consequence of, or otherwise in connection with, any amendment (or repeal or revocation) made in this Part by any enactment contained in an Act passed after this Act (an “amending Act”).
(3B) An order under subsection (3A) may, in particular, include savings from the effect of any amendment (or repeal or revocation) made by the amending Act.
(3C) An order under subsection (2) or (3A) may include provision having effect in relation to times before it is made if it does not increase any person's liability to tax.”
(3) In subsections (4) and (5), after “(2)” insert “or (3A)”.'.
No. 397, in schedule 23, page 190, line 26 [Vol II], leave out from ‘for' to end of line 28 and insert
‘ “of a pension scheme” there were substituted “of any arrangement within paragraph 15A(4) under a pension scheme”.'.—[Ed Balls.]

Schedule 23, as amended, agreed to.

Clause 163

Raising of thresholds

Question proposed, That the clause stand part of the Bill.

Celia Barlow: I wholeheartedly support Clause 163, raising the threshold for stamp duty land tax on residential transactions from £120,000 to £125,000. This, of course, follows the welcome doubling of the threshold in March last year and Government initiatives to help young people and key workers to get on the housing ladder.
However, the average price for a residential property in Brighton and Hove has risen to £222,241 in the first quarter. A flat or maisonette costs, on average, £168,236. That implies that the increase will probably not have the desired effect in my part of the world. Although we have made great progress in tackling homelessness, with a 75 per cent. cut in people sleeping rough since 1997, and although tens of thousands of people have been given new life chances, homelessness and overcrowding are still key indicators of child poverty. There are also many young families and public servants in my area who face difficulties in buying their own homes, albeit even the tiniest flat.
I therefore tactfully ask the Minister whether further such increases in the threshold might be considered if that proves to be affordable for the public purse. As house prices nationally rose by 6 per cent. in the year to the first quarter, I presume that could be done in a way that is revenue neutral.

Julia Goldsworthy: I have a very brief question for the Economic Secretary about the changes to stamp duty land tax. I would be interested to hear the rationale behind the increase and to hear what impact he thinks that it will have on home buyers, particularly first-time buyers as mentioned by the hon. Member for Hove (Ms Barlow). Surely it is the slab-like structure of stamp duty land tax that poses so many problems for first-time buyers, because they have to pay a percentage of the whole value of the property rather than paying on a sliding scale.
In my constituency, where average house prices are above the threshold, the difficulty for first-time buyers is not just stamp duty but the gap between incomes and house prices. Houses are worth many multiples of people’s incomes. Stamp duty is only a tiny proportion of the problem. Only a tiny proportion of houses will fall below the threshold, so I will be interested to hear what impact the Economic Secretary feels that the minor change being made will have on behaviour and on opening up the housing market to more first-time buyers.

Stewart Hosie: I have a similar question. In Scotland, the average price of a first-time buyer’s property is less than the stamp duty threshold, so stamp duty is of little consequence to first-time buyers other than those who are very rich or who can afford to pay many multiples of their income. The real difficulty for us is that the larger family houses now being built are routinely priced by developers at £300,000 at least, and so attract the higher level of stamp duty. What is the Economic Secretary’s thinking on that for the longer term? Families with good incomes are effectively priced out of the larger family homes that they may wish to live in.

Edward Balls: I thank hon. Members for their contributions. To give a bit of background, the clause increases the starting threshold for stamp duty land tax to £125,000. That follows the doubling of the threshold last year. The increase means that an additional 40,000 home buyers a year are taken out of stamp duty. The doubling of the threshold in 2005 and this year’s increase together mean that a total of 400,000 home buyers a year are out of stamp duty entirely; that is about 50 per cent. of all home buyers.
My hon. Friend the Member for Hove makes the good point that there is regional variation in house prices. In London, 26 per cent. of home buyers are exempt. Some 25 per cent. of those in the south-east will be exempt after the changes that we propose, but the figure is 78 per cent. in Wales, 75 per cent. in the north-west, 72 per cent. in Scotland, and 83 per cent. in the north-east. Given that the stamp duty regime is national, and given the regional variation in house prices, at least a quarter of all home buyers across the country will benefit, but that proportion rises to well over three quarters of home buyers in those parts of the country where house prices are lower. That seems a fair and equitable way in which to proceed.

Julia Goldsworthy: I represent a constituency in Cornwall, which is the poorest county in England. In some parts of Cornwall, house prices are up to 10 times average income, which is often 20 per cent. below the national average. In such places, there is real inequality, and great difficulty in getting a foot on the housing ladder. The problem of access to the housing market is not just in the south-east, and does not just affect people with poorer incomes who live where house prices are lower. The increase does not resolve that issue.

Edward Balls: I completely agree with the hon. Lady. She is pointing to the wider issue of housing policy and to the need to tackle the still substantial deficiency in the supply of new housing, particularly in the south. Despite the substantial extra investment that has gone into social housing and despite the Barker review, we are still not building enough houses, which means that it is much more difficult for a first-time buyer on average or below-average income to get on the housing ladder than it was 20 years ago.
I completely accept the hon. Lady’s point but, frankly, although stamp duty can play a role in dealing with the issue, it will not solve the problem in any way. There are things that we can do to help first-time buyers, and stamp duty is part of that. Stamp duty also plays an important role in raising revenue in our economy and in making the housing market work efficiently. The problem with saying easy things such as, “Why don’t you move from a slab system to a slice system?” or “Why don’t you abolish stamp duty entirely, or raise its limits substantially?” is that that costs billions of pounds that would have to be found somewhere else. Simply doing those things without addressing the fundamental point of housing supply in our country would not meet the challenge in her constituency and constituencies throughout the country.
I was taunted earlier about housing issues by the hon. Member for Fareham, who looked forward to tomorrow’s debate on housing policy on the Floor of the House. Over the breakfast table this morning, I read a quote from the hon. Member for Chipping Barnet (Mrs. Villiers), the shadow Chief Secretary to the Treasury. She said to her constituents last year:
“Suburbs like Barnet are under attack from John Prescott’s excessive targets for new house building.”
She also said:
“Mrs. May has called on our council to fight the Government plans which she believes will turn the royal boroughs into a concrete jungle”—

John Butterfill: Order. The Economic Secretary is going somewhat wide of the subject under debate.

Edward Balls: One could say the same of the earlier remarks of the hon. Member for Fareham about housing policy. I was asked whether stamp duty would solve the problem, and I was making the point that unless we have a consensus across all parties in the House—not just on stamp duty, REITs and shared equity but on building houses for people to live in—we will never tackle the inefficiencies in our economy and the inequalities to which the hon. Member for Falmouth and Camborne referred. If Members of the House speak words suggesting that they are on the side of working families but spend their time making statements contrary to the interests of first-time buyers by opposing new development and saying that concrete jungles and new houses must be opposed—

John Butterfill: Order. I cannot have this any longer. We are debating stamp duty in this Committee, not housing policy. I will not allow any further debate on the subject.

Edward Balls: In that case, Sir John, I shall sit down.

Question put and agreed to.

Clause 163 ordered to stand part of the Bill.

Clause 164 ordered to stand part of the Bill.

Schedule 24 agreed to.

Clause 165 ordered to stand part of the Bill.

Schedule 25

Stamp duty land tax: amendments of Schedule 17a to FA 2003

Amendment made: Government No. 382, in schedule 25, page 198, line 39 [Vol II], at end insert—
‘() At the end of that paragraph insert—
“(7) The reference to a lease in sub-paragraph (1) is to—
(a) a lease actually granted on or after the implementation date, or
(b) a lease that is treated as existing by reason of a deemed grant under paragraph 12A(2) or 19(3) of which the effective date is on or after the implementation date.”'.—[Ed Balls.]

Schedule 25, as amended, agreed to.

Clauses 166 and 167 ordered to stand part of the Bill.

Clause 168

Demutualisation of insurance companies

Mark Hoban: I beg to move amendment No. 184, in clause 168, page 138, line 20 [Vol I], leave out from second ‘company' to end of line 25 and insert
‘in connection with demutualisation of an insurance company'.
This is a brief amendment to consider demutualisation of insurance companies in a slightly different light. The amendment would extend the reliefs to situations in which one mutual must take over another mutual that has fallen into financial difficulty, for example, and probes whether there would be an exemption or release from stamp duty in those circumstances, given that demutualisations have cropped up in the debate.
I add a further comment to save the need for a stand part debate on the clause. The Economic Secretary will probably have received representations from the Institute of Chartered Accountants in England and Wales on this matter. The reliefs in the Bill apply in the very final stage of a demutualisation, and similar issues arise in clause 170. The suggestion is that the reliefs should also be available in the steps leading up to demutualisation. At the moment, the companies going through the process have to apply for anti-avoidance reliefs instead. It would be much more elegant and straightforward if the same reliefs that apply at the point of demutualisation applied in all the stages preparatory to that taking place.

Edward Balls: As the hon. Member for Fareham told the Committee, the clause concerns the stamp duty land tax and the consequences for SDLT when a mutual insurance company transfers its business to a group headed by a company listed on the stock exchange, a process normally referred to as demutualisation.
The amendment to the clause extends the reliefs available under the stamp duty land tax when a mutual insurance company transfers its business to such a company. At present, the clause gives relief only where as part of the demutualisation process shares in the listed company are offered to members and employees of the mutual company, and to those persons only. In other words, the only demutualisations affected by the clause are those where, immediately after transfer of business, those who were members or employees of the mutual company—and only those persons—own the new listed company.
Relief is not available when a mutual company transfers its business to an existing listed company with outside shareholders. The proposed relief and the existing relief on the stamp duty land tax and the stamp duty reserve tax reflect the fact that the ownership of the business, apart from the issue of shares to employees, is effectively unchanged. As discussed on an earlier clause with my hon. Friend the Member for Wolverhampton, South-West (Rob Marris), the Government’s policy is that the SDLT treatment of this type of demutualisation should be neutral in tax terms, neither favouring nor hindering the process.
The amendment would extend the relief in the clause to any situation where mutual insurance companies cease to be mutual, including the purchase of a mutual company by an existing listed company with outside shareholders—effectively a takeover of the mutual company. The Government do not think it is appropriate to extend tax relief in that way. I should point out that clause 168 is an extension to the existing SDLT relief for demutualisations, when shares are offered to members. The amendment would not extend existing SDLT relief to takeovers and so would not achieve the aim intended. However, as I said, we do not think extending demutualisation reliefs to takeover scenarios appropriate.
I was asked a couple of other questions. The hon. Gentleman asked whether the relief applies when a mutual takes over a mutual. The answer is no. The existing relief applies only when shares are offered to existing members. He asked whether reliefs should be available in the steps leading up to demutualisation. That is the intention of the clause. The ICAEW representations did not relate to demutualisation, but to corporate reconstruction. I hope that that answers his two related points. On that basis, I urge the Committee to reject the amendment.

Mark Hoban: I am grateful to the Minister for that response. He makes a valid point about how my amendment would affect other forms of takeovers. I suspect that he is right about that.
I will conclude by sharing with the Committee a quote that Mr. Cranmer provided, which might be appropriate to characterise some of the discussions that we have had to date between the various professions on the Committee. A solicitor at the Ecclesiastical Law Society annual general meeting said that all lawyers would be accountants if they could add up, just as all accountants would be lawyers if they could read.
On that basis, I beg to ask leave to withdraw amendment No. 184.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Rob Marris: I shall be brief, because we had a debate earlier on this matter, as my hon. Friend the Economic Secretary said. I shall abstain on clause 168. I do not think that we should be neutral on tax terms for demutualisation. I previously declared my interest as a member of Standard Life. Interestingly, since the other 95 per cent., or whatever, of Standard Life members voted for demutualisation, the prospective share price in that organisation has tanked because of the way the market has gone. My hon. Friend the Economic Secretary says that a takeover by a private company, as opposed to another mutual with an amalgamation, would not get the benefit of clause 168, but I reiterate to him that a Labour Government should not be neutral on tax terms for mutuals and doing so in this way is a step towards encouraging demutualisation, which I regard as most regrettable.

Question put and agreed to.

Clause 168 ordered to stand part of the Bill.

Clause 169

Alternative finance

Question proposed, That the clause stand part of the Bill.

Edward Balls: The clause is about delivering a level playing field but, at the same time, taking steps to liberalise the stamp duty land tax treatment of alternative finance mortgages. It is therefore in the spirit of some of our earlier debates on different aspects of the tax system.
The clause will benefit anyone who wants to access financial products that do not involve interest, especially those who do not want to pay interest for religious reasons. Current tax treatment makes such products more expensive than other financial products. Alternative finance mortgages generally involve the purchase of a property by a bank and resale to the customer at a premium. The resale to the customer is currently exempted from stamp duty land tax if the customer is an individual. The clause extends its relief to all, including companies; it has been developed in concert with business in response to a demand on the market for alternative finance products. As with the previous clauses in this area, I commend it to the Committee.

Question put and agreed to.

Clause 169 ordered to stand part of the Bill.

Clause 170 ordered to stand part of the Bill.

Clause 171

Rate of landfill tax

Question proposed, That the clause stand part of the Bill.

John Healey: I welcome you to the Chair, Sir John.
The clause takes us into part 9 of the Bill, which is entitled “Miscellaneous provisions”. Perhaps hon. Members will take heart from the fact that, although we are not quite there yet, the end of our proceedings is in sight. In line with the 2005 pre-Budget report announcement, the clause increases the standard rate of landfill tax, which applies to active waste disposed to landfill, by £3 per tonne to £21 per tonne with effect from 1 April. The Government have been urged to provide clarity and certainty in their policy framework to give the greatest possible certainty for those looking to raise investment in the long term. We announced as long ago as the pre-Budget report in 2002 that the standard rate would increase by at least £3 per tonne each year on the way to a medium to long-term price for the landfill standard rate of £35 per tonne. A steadily increasing rate sends a clear market signal, and announcing the increases in advance maximises that effect.
The increase will encourage waste producers to seek more environmentally friendly alternatives to landfill by encouraging them and the waste management industry to switch more to waste minimisation, alternative forms of disposal, reuse and recycling and, therefore, away from landfill. The increase covered by the clause, and the future increases already announced, are part of a principled, broad national policy to reduce the volumes of waste in this country going to landfill and are complemented by significant additional public spending on sustainable waste management and other policy mechanisms that are in place. There are clear signs that the combination of landfill tax rates and those other measures is beginning to have the impact that we want and reducing our reliance on landfill. The amount of active waste going to landfill between 1997 and last year fell by almost 16 per cent.
Increases such as that proposed by clause 171 are an important part of that policy mix and of the long-term signals to the industry, and a long-term contribution to the important shift away from landfill to other more environmentally friendly and sustainable forms of waste management. I commend the clause to the Committee.

Paul Goodman: It is a pleasure to see you in the Chair, Sir John.
As the Financial Secretary has intimated, this is one of the shortest, perhaps the most predictable, clauses in the Bill. In the 2003 Budget, the Government confirmed that the tax would increase, in that year, to £18 and by £3 a year thereafter, on the way to £35. The Government have carried through that policy in this year’s Budget, and we have no intention of opposing the clause.

Question put and agreed to.

Clause 171 ordered to stand part of the Bill.

Clause 172

Climate change levy: rates

Question proposed, That the clause stand part of the Bill.

George Young: It is a pleasure to see you in the Chair, Sir John. Thismay be my last contribution to this Finance Bill. It is 10 years since I last participated in a Finance Bill Committee, and I think it will be 10 years before I do another.
The clause changes the rate of the climate change levy, and I have no difficulty with the principle behind it. I should like clarification on two issues. As the explanatory note says, the rates are being increased to maintain their real value and environmental effect. In page 14 of the Red Book for the 2006 Budget, one sees: 
“Climate change levy: revalorise from 1 April 2007...—20 —20 —20”.
Will the Minister explain why increasing the levy produces that negative effect? Perhaps it is because it is reinvested somewhere else and given back to industry, but it would be helpful to have an explanation.
My other point is about the relationship between the climate change levy and the cost of electricity. I want to find out whether there is a parallel between the treatment of the climate change levy and that of the duty on petrol. When the Government have reviewed the duty on petrol, they have looked at the market price of petrol. When that has escalated, they have taken the opportunity to defer the increase on the grounds that they want to use the price mechanism to promote efficiency. If the market price has gone up, that has an impact on the imperative to increase the petrol duty.
The same argument could apply to the climate change levy. If the market price of electricity is going up—and it is—does that impact on the Government’s policy on the climate change levy? In other words, is there a direct read-across between their policy on the petrol duty and that on the climate change levy, or is the climate change levy in a little box on its own, to be driven up irrespective of what happens to the market price of electricity? It would be helpful if the Minister shed a bit of light on that issue.

Paul Goodman: I have only one further question on the climate change levy. It is in the same territory as the question just asked by my right hon. Friend. Commenting on the change proposed in the Budget, the National Farmers Union said that
“it is not clear from the Budget documentation how the additional revenues from the increase in levy rates will be returned.”
I presume that they will be returned in the same manner as always, but I should like the Financial Secretary to cast a bit of light on that question.

John Healey: As a current Treasury Minister, I say to the right hon. Member for North-West Hampshire (Sir George Young) that we measure our contributions on a year-to-year basis in Finance Bills; I am interested that he does so on a decade-to-decade basis. I look forward to the Finance Bill in 10 years’ time, when he makes a return appearance.
The right hon. Gentleman asked me two specific questions. The scoring in the Red Book is essentially the impact on the scorecard of revenues looked at from this current financial year onwards. Clearly, because we are delaying the revalorisation and not increasing by the rate of inflation this year, there is a hit to the public finances of about minus £20 million, which is what is scored.
On the question of the comparability—or the alignment of the decisions that we have taken on fuel duty—the right hon. Gentleman will remember from his period of serving in the Treasury that with any tax the specific decisions that the Chancellor takes on rates are taken as a result of a combination of factors. However, they are also taken in relation to the purpose of the particular tax itself.
The right hon. Gentlemen may remember that historically the principal purpose of fuel duty for Governments of all parties has been to make a significant contribution to the overall public finances. It has also played a part in dealing with the challenge of climate change. Historically, for several decades, the levels of fuel duty in the UK have been comparably and relatively high. If he examines the decisions that we have taken on fuel duty over the past six years, he will see that they have been made bearing in mind the imperative to raise revenue for public services, the concern about climate change and the costs and pressures on consumers and on road fuel-using industry.
The fact that we have consistently frozen fuel duty, although we raised it in line with inflation in 2003, means that cumulatively, in the face of rising world oil prices and pump prices, the relative take in tax of fuel duty has decreased. Since 2000, there has been a real reduction in the value of fuel duty of 8p per litre, which is of benefit to the motorist and the haulier. In addition, to a significant degree it offsets the price pressure, which is driven by world oil prices and reflected at the pumps. That is the balance of factors that the Chancellor took into account in making his decisions on fuel duty this year and in previous years.
I think the right hon. Gentleman will remember that when we announced the climate change levy back in 1999 we made it clear that our expectation was that when it was properly established it would be revalorised; it would be raised annually in line with inflation. That would be done to maintain its real value and, specifically, to maintain its incentive effect—that is its principal purpose, unlike fuel duty—to encourage business to invest in and do more on energy efficiency and make the gains that are possible.
Having seen a period of bedding in of the new levy since its introduction, the Chancellor’s decision and judgment is that now is the time to seek to revalorise the climate change levy. Given the pressure on fuel costs and energy prices, it is important both to signal that intention so that businesses can recognise that that is coming and take any steps that they might wish to improve their own business efficiency, and to delay changes until 1 April 2007. That is what the clause does.
In other words, the rates under clause 172 are being increased to ensure that the levy continues to have the beneficial effect that we intended—its principal purpose—of trying to encourage business to reduce its energy usage and increase its energy efficiency. On that basis, I hope that all Committee members will give backing to the clause and in doing so give backing to the climate change levy and the essential contribution that it makes to the UK’s necessary set of measures to tackle climate change.

Question put and agreed to.

Clause 172 ordered to stand part of the Bill.

It being One o’clock the Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four o’clock.